I’ve been getting questions about oil and petrol prices and the role of Russia. For what it’s worth here is my take. The Brent oil price yesterday was US$132.33 per barrel (8 March) and Australian ULP petrol prices are passing $2/litre.
Q. Why are oil prices shooting up?
A. The oil market was very tight even before the invasion. COVID smashed oil consumption, oil prices and investment in supply in 2020. There is also a growing global consensus about the need to reach net zero by 2050 and therefore that peak oil demand is imminent and there is no need for further exploration etc. That has all discouraged investment in supply. Since 2020 oil demand has roared back with the post-COVID recovery but even OPEC is unable to achieve its production targets. That has all put pressure on prices. Then, on top of that there is all the uncertainty created from the Ukraine situation and the Russian invasion.
Q. Will releases from emergency stockpiles make a big difference?
A. It is probably dampening expectations of higher prices but otherwise probably not.
Q. What other factors are at play?
A. Every sign is that air travel is coming back. That will put upward pressure on prices. Aircraft use a lot of jet fuel. On the other hand high prices should start to impact demand. Also if it is possible for the US to do a new nuclear deal with Iran that would free up Iranian supply. However Russia is also involved in that.
Q. What might happen to Australian petrol prices?
A. I wouldn’t be surprised if they got to $2.50.
Q. Are high oil prices bad for the Australian economy?
A. In January Australia’s petroleum exports (including LNG) were $7.5 billion and imports $3.4 billion so the balance of payments and terms of trade benefit from high oil prices. However higher prices hurt consumers, industry, freight and feed into inflation.
Q. Does Australia import oil from Russia?
A. Hardly any. In 2021 only 24% of our oil imports were crude oil, the other 76%was refined products like petrol, diesel and jet fuel. The only petroleum we imported from Russia was crude oil and that was only 1.1% of our crude imports. The biggest supplier of crude oil to Australia is Malaysia.
Q. What about the other 76%, which is refined products? Where is that from?
A. In 2021 80% came from Singapore, Korea, Malaysia, India and Japan. Even they don’t get much from Russia. In 2020 53% of Russian crude exports went to Europe, 32% to China, 1% to India, 2% to Japan, 0.1% to Singapore and 4% to other Asia Pacific. The only indirect connection with Australia is refined product from China. China supplied 7% of our refined product in 2021. China gets its crude from everywhere.
Q. Australia is not dependent for much from Russia, are we trading competitors?
A. Yes, as both are resource and agricultural exporters. Australia has been far more successful than Russia in exporting to China, despite the fact that Russia has a 3,000 km land border with China. The value of Russia’s exports to China was US$147 billion in 2021 according to Reuters (1 March). This has only just passed Australia’s US$133 billion. However Russian trade with China is growing.